Nike Tops Estimates. Is This the Start of a Turnaround for the Stock?

Core Viewpoint - Nike's fiscal Q2 results showed a decline in sales and profits, with the new CEO indicating that a turnaround will take time, leading to a nearly 30% drop in stock price year-to-date [1][10]. Sales Performance - Nike's sales fell 8% year-over-year to $12.35 billion, surpassing the analyst consensus of$12.12 billion [3]. - Nike brand revenue decreased by 7% to $12 billion, while Converse sales dropped 17$529 million [3]. - Direct revenue declined 13% to $5 billion, and wholesale revenue decreased by 3$6.9 billion [3]. Profitability Metrics - Gross margin decreased by 100 basis points to 43.6%, primarily due to discounting practices [4]. - Adjusted earnings per share (EPS) fell 24% to $0.78, exceeding the analyst consensus of$0.63 [4]. Inventory and Future Outlook - Nike's inventory remained flat year-over-year, which poses a challenge given the sales decline [5]. - The company anticipates a low double-digit revenue decline in fiscal Q3 and a gross margin decrease of 300 to 350 basis points [5]. Strategic Initiatives - The new CEO plans to transition Nike Digital back to a full-price model and reduce reliance on promotions, focusing on sports and product innovation [6]. - The strategy aims to restore wholesale relationships and emphasize brand-specific marketing [7]. Valuation and Market Sentiment - Nike's stock currently trades at a forward price-to-earnings (P/E) ratio of approximately 25 times next fiscal year's estimates, one of the lower levels in recent years [8]. - A turnaround is expected to take time, likely not materializing within the current fiscal year ending in May 2025, but signs of improvement could lead to a stock rebound [10][11].